10-Q 1 q101st02.txt Form 10-Q Securities and Exchange Commission Washington, D.C. 20549 [ X ] Quarterly report pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended September 30, 2001 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ____________ to _____________ Commission file number 1-8680 High Plains Corporation (Exact name of registrant as specified in its charter) Kansas #48-0901658 (State or other jurisdiction of incorporation or (IRS Employer organization) Identification No.) 200 W Douglas 67202 Suite #820 (Zip Code) Wichita, Kansas (Address of principal executive offices) (316) 269-4310 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under plan confirmed by a court. Yes No Common Stock, Par Value $.10 per share, Outstanding at September 30, 2001 - 16,400,890 PART I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Balance Sheet 3 - 4 Statements of Operations 5 Statements of Comprehensive Income/(Loss) 5 Statement of Stockholders' Equity 6 Statement of Cash Flows 7 Selected Notes to Financial Statements 8 - 10 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 - 12 PART II OTHER INFORMATION Item 3. Legal Proceedings 12 Item 4. Other Information 12 Item 5. Exhibits and Reports on Form 8-K 12 - 14

HIGH PLAINS CORPORATION Selected Notes to Financial Statements 1) Basis of Presentation The accompanying financial statements have been prepared by High Plains Corporation ("Company") without audit, unless otherwise noted. In the opinion of management, all adjustments (which include only normally occurring adjustments) necessary to present fairly the financial position, results of operations and changes in financial position for the periods presented, have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principals have been condensed or omitted. The results of operations for the period ended September 30, 2001 are not necessarily indicative of the operating results for the entire year. 2) Financial Arrangements On December 3, 1999, the Company was able to obtain a $28 million credit facility through Bank of America. The credit facility consisted of a $20 million term loan and an $8 million revolving line-of-credit. The credit facility is for a five-year period, which may be extended for a series of one-year renewals. On February 23, 2001, the Company entered into its second amendment to the original loan agreement with Bank of America, thus enabling the Company to proceed with the York, Nebraska facility's fuel grade expansion project. The second amendment included a provision that established a $5 million reserve against the Company's revolving line-of- credit. At September 30, 2001, the Company's $8 million line-of-credit had $7 million of unreserved availability which was fully available and undrawn. 3) Stock Options On July 18, 2001, 37,500 options were granted at $4.13 per share, as reloads under the original provisions of the option grants, to key management personnel and directors. On July 30, 2001, 25,000 options were granted at $4.30 per share, as reloads under the original provisions of the option grants, to the president. The option grants were made at the fair market value of the stock on the date of grant. An additional 36,000 options were exercised during the quarter by a former employee. 4) Stock-Based Compensation The Company continues to account for stock-based compensation for employees using the intrinsic value method prescribed in APB No. 25. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Had compensation cost for the stock-based compensation been determined based on the fair value grant date, consistent with the provisions of FAS 123, the Company's net earnings and diluted earnings per share above would have been reduced to pro forma amounts below:

5) Earnings Per Share The Company, as required under FASB Statement No. 128 Earnings Per Share (FAS 128) has replaced the presentation of primary earnings per share (EPS) with Basic EPS and Diluted EPS. Under FAS 128 both the basic and diluted must be presented in the financial statements. Also, under the FAS 128 all prior period EPS data presented in the financial statements must be restated for comparative purposes. The diluted earnings per share for the three months ended September 30, 2001 and 2000 have been calculated based on 17,118,441 and 16,347,207 diluted shares outstanding, respectively. 6) Inventories

7) Other comprehensive income Under FASB Statement No. 130, Reporting Comprehensive Income, the Company is required to report the total of other comprehensive income as a component of equity that is displayed separately from retained earnings and additional paid-in capital whenever such items exist at the end of the accounting period. In addition, the Company must also present a Statement of Comprehensive Income that presents other comprehensive income items as adjustments to the Company's net income after tax results, net of tax.

8) Derivatives and hedging activities During the first quarter of fiscal 2001, the Company adopted the provisions of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS 133 requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivatives qualify as hedges of recognized assets, liabilities or firm commitments under SFAS 133, changes in the fair value of derivatives are offset against the changes in fair value of assets, liabilities, or firm commitments through earnings. If the derivatives qualify as cash flow hedges of forecasted transactions, then changes in the fair value of the derivatives are recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the derivative's change in fair value, if any , will be immediately recognized in earnings. Under the Company's grain and fuel ethanol risk management programs, the Company routinely holds financial derivative positions on the Chicago Board of Trade (CBOT) and New York Mercantile Exchange (NYMEX) to mitigate the market price volatility associated with the Company's grain inputs and fuel grade ethanol outputs. These positions (short-NYMEX unleaded gasoline futures and long-CBOT corn futures) are designated as cash flow hedges of forecasted transactions at the inception of the transaction and as such are accounted for under the provisions of SFAS 133. The Company also routinely enters into forward contracts to procure its grain purchase requirements and sell its anticipated fuel grade ethanol production. Some of these forward contracts are unpriced, subject to market fluctuations, and some of them are priced. The Company's fixed priced forward contracts are not considered derivatives and, accordingly, changes in the market value of such contracts are not recognized; instead, the fixed price is recognized in the financials at the time the related commodity is consumed in the conversion process or delivered to the customer. The Company does not enter into forward contracts in excess of its anticipated future grain needs or fuel grade ethanol production volumes. As of and during the quarter ended September 30, 2001, the Company held derivative positions accounted for as cash flow hedges of its forecasted purchases and sales, under SFAS 133. The resulting net gain or loss from such derivatives is reported in cost of goods sold when the forecasted transaction occurs. The derivative gains or losses reflected in other comprehensive income at September 30, 2001, will be recognized in earnings during the subsequent time period when the related forecasted transaction occurs, generally during the subsequent quarter. The Company does not hedge all of its forecasted commodity transactions. 9) Segment Information Segment information has been prepared in accordance with FASB SFAS No. 131 (SFAS 131), "Disclosures about Segments of an Enterprise and Related Information." Segments were determined based on products and services provided by each segment. Accounting policies of the segments are the same as those described in the summary of significant accounting policies. Performance of the segments is evaluated on gross profit before allocated selling, general and administrative expenses and income taxes, excluding other income and expenses. The Company believes its gross profit approach for evaluating each segment's performance is a better indicator of the segment's incremental contribution to the Company's performance. This approach mitigates the impact of subjective allocations of selling, general, and administrative expense, which may or may not be incremental in relation to the increased activity related to the segment. Intersegment sales were made at prices approximating current market value. The Company has two reportable segments: (1) ethanol production and (2) ethanol marketing. The ethanol production segment produces and sells ethanol and its by-products. The ethanol marketing segment actively markets fuel ethanol purchased by the Company, in bulk, from independent producers unrelated to the Company. The Company has also contracted to provide process and operational consulting services to select ethanol producers, but provided no consulting services in fiscal years 1999 through 2001.

10) Subsequent Event On November 1, 2001, the Company signed an agreement with Abengoa, S.A. and its wholly-owned subsidiary, ASA Environment and Energy Holding, A.G. (ASA), for ASA to acquire all of the outstanding shares of the Company pursuant to a cash tender offer at a price which is expected to be approximately $5.63 per share. The transaction is subject to certain conditions, including the tender of the Company's shares giving ASA at least 75% of the outstanding shares of the Company's common stock on a fully diluted basis. Part I MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 2. Forward-looking Statements Forward-looking statements in this Form 10-Q, future filings including but not limited to, the Company's annual 10K, Proxy Statement, and 8K filings by the Company with the Securities and Exchange commission, the Company's press releases and oral statements by authorized officers of the Company are intended to be subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the risk of a significant natural disaster, the inability of the Company to ensure against certain risks, the adequacy of its loss reserves, fluctuations in commodity prices, change in market prices or demand for motor fuels and ethanol, legislative changes regarding air quality, fuel specifications or incentive programs, as well as general market conditions, competition and pricing. The Company believes that forward-looking statements made by it are based upon reasonable expectations. However, no assurances can be given that actual results will not differ materially from those contained in such forward- looking statements. The words "estimate", "anticipate", "expect", "predict", "believe" and similar expressions are intended to identify forward-looking statements.

Results of Operations Net Sales and Operating Expenses. Net sales and revenues for the three months ended September 30, 2001, increased 48% compared to the same period ended September 30, 2000. The increase was driven by higher average sales prices and increased trading sales volume. Fuel grade ethanol trading sales volume increased 281% compared to trading sales volume for the same period ended September 30, 2000. The trading sales volume increase resulted from both the Company's trading strategy and unanticipated downtime at the Company's York, Nebraska facility. The Company continued to focus on its strategy of trading other producers' ethanol output to better utilize its marketing resources and better sever its core customers. Lost production from the protracted downtime necessary to complete the York, Nebraska facility expansion tie-in and the subsequent extended start-up phase created contract shortages that were fulfilled with trading volume. Fuel grade ethanol prices remained strong during the first quarter of fiscal 2002 at an average price of $1.41 per gallon, which was a 13% increases over the average price per gallon for the same period ended September 30, 2000. Fuel grade ethanol's price strength resulted from higher gasoline prices, tighter ethanol supplies, and a greater percent of sales based on variable priced contracts compared to the same period ended September 30, 2000. Industrial ethanol sales prices benefited from the higher fuel ethanol sales prices, as increases in fuel ethanol generally translate into increases to industrial ethanol prices. Industrial ethanol prices increased 10% compared to the same period ended September 30, 2000. Cost of products sold as a percentage of net sales and revenues increased 8.4% to 97.2% for the quarter ended September 30, 2001 compared to 88.8% for the same period ended September 30, 2000. The increases resulted from increased trading volume, lower proprietary production volume, higher grain prices, and higher natural gas prices compared to the same period ended September 30, 2000. Margins on the Company's trading volume are generally significantly lower than margins on proprietary production. With trading volume making up a larger percentage of the sales mix in the first quarter of fiscal 2002 compared to first quarter of fiscal 2001, the higher trading volumes effectively skewed up the cost of goods percentage compared to the same period ended September 30, 2000. The lost proprietary production at the Company's York, Nebraska facility contributed to the increase in cost of goods percentage. The production process has a considerable amount of fixed costs associated with it, thus much of the York, Nebraska's facility's costs were incurred in the first quarter of fiscal 2002 even though the facility's output was significantly lower than its output in the first quarter of fiscal 2001. Grain costs increased $.22 per bushel compared to the same period ended September 30, 2000. The increase in grain costs resulted from both higher Chicago Board of Trade (CBOT) futures prices and higher local basis differentials compared to the same period ended September 30, 2000. Natural gas costs increased from an average price of $4.03 per million British Thermal Unit (MMBTU) in the first quarter of fiscal 2001 to an average price of $5.54 per MMBTU in the first quarter of fiscal 2002. Selling, general and administrative (SG&A) expenses remained flat for the quarter ended September 30, 2001, compared to the same period ended September 30, 2000. Net Earnings. Net earnings decreased 95% for the three months ended September 30, 2001, compared to net earnings for the same period ended September 30, 2000. The decrease is the result of 8.4% decrease in gross profit percentage compared to the same period ended September 30, 2000. The decline in the Company's gross profit percentage was primarily driven by the increase in trading volume compared to the same period ended September 30, 2000, as the Company's higher grain and natural gas costs were mostly offset by higher average sales prices for the first quarter of fiscal 2002. The foregone production associated with the York, Nebraska facility expansion was the principal driver of the decrease in net earnings. Diluted earnings per share at September 30, 2001, were $.08 lower than diluted earnings per share for the same period in 2000 due to the decreased earnings.

The Company's primary source of funds during the quarter ended September 30, 2001 was cash flow from operating activities. Working capital decreased approximately $3.5 million compared to the period ended June 30, 2001. The decrease in working capital was due to a $6.1 million decrease in cash and cash equivalents, which was partially offset by increases in accounts receivable and prepaid expenses. The majority of the cash was used to fund the York, Nebraska expansion and annual turn-arounds at both the York, Nebraska and Portales, New Mexico facilities. Capital expenditures for the first three months of fiscal 2002 amounted to approximately $6.3 million, which was primarily for the 14 million-gallon expansion of the York, Nebraska facility. The Company has an $8 million revolving line-of-credit, which was a component of the credit facility obtained through Bank of America in December 1999. In February 2001, the Company amended the original loan agreement to allow for the $10 million York, Nebraska expansion. The agreement stipulated a non-recoverable $2.6 million prepayment on the Company's estimated fiscal 2001 excess cash flow recapture and placed a $5.0 million reserve on the Company's revolver. The reserve is reduced by suppressed borrowing capacity, as determined by the monthly borrow base certificate calculation. At September 30, 2001, the Company's $8 million line-of-credit had $7 million of unreserved availability which was fully available and undrawn. As of the end of the first quarter, the Company was in violation of two covenant provisions of the loan agreement. Subsequently, the Company amended the loan agreement with Bank of America and in doing so obtained waivers for the two covenant violations. The Company believes it has adequate short-term working capital and borrowing availability under its financing arrangement to meet its operating cash needs. However, in the event the Company encounters unforeseen changes in market conditions that adversely affect its ability to generate cash flow from operations, the Company could seek to raise additional funds through the sale of stock, or issuance of debt and/or equity securities. Seasonality Fuel grade ethanol prices are historically soft during the non-oxygenate period, which coincides with the Company's first and fourth fiscal quarters. Typically fuel grade ethanol prices firm up during the winter months, which coincide with the Company's second and third fiscal quarters, due to the mandated markets of the Federal Oxygen Program. Prices generally increase in the weeks before September, and decrease by March due to shipping schedules. Additionally, fuel grade ethanol prices historically have been influenced by the price of unleaded gasoline, which remained strong during the first quarter of fiscal 2002. Due to the continued strength of the unleaded gasoline market and tight fuel ethanol supplies, fuel grade ethanol remained uncharacteristically high through the first quarter of fiscal 2002. Now with the Company entering into the oxygenate season, the Company believes fuel ethanol pricing will remain at the current levels throughout the oxygenate season. Furthermore, the Company has contracted approximately 70% of its fuel grade ethanol production through the March 2002 (end of oxygenate season) at fixed prices, thus minimizing the Company's exposure in the event of an unforeseen downturn in the market, but conversely limiting the Company's ability to gain from additional market increases. Currently, there is legislation pending which could significantly affect the demand for fuel grade ethanol either positively or negatively. Current legislation is attempting to deal with the perceived problems surrounding the MTBE environmental contamination issues by phasing out MTBE over the next several years, eliminating the oxygenate requirement, and implementing a minimum renewable fuels content for all fuel consumed, excluding diesel. As of September 30, 2001, no such legislation had been enacted. Although corn and milo feedstock prices have increased somewhat over the last several months, market fundamentals (projected crop size, carryouts, export and demand numbers) appear to indicate flat or slightly higher grain prices through the next crop year. As always, grain prices are subject to significant changes due to weather patterns, or in the event of changes in the fundamental market factors described above. The Company has currently contracted approximately 10 million bushels under either fixed priced forward contracts, or unpriced basis differential forward contracts, which will be priced at a later date. The Company continues to utilize grain futures contracts to hedge against price fluctuations related to its grain feedstock requirements. Prices for the Company's distillers grain by-products, as known as distillers grain solubles (DGS), historically fluctuate with the price of corn, and provide the Company with some hedge against the possibility of higher grain prices. As grain prices firmed up in the first quarter of fiscal 2002, DGS prices strengthened in the first quarter of fiscal 2002. The Company has emphasized production of a wet distillers grain product at its facilities in an effort to strengthen and stabilize its feed markets. However, unanticipated declines in grain prices could also result in a decline in prices for the Company's DGS products. PART II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS No new legal proceedings were instigated during the quarter ended September 30, 2000, which would be considered other than in the ordinary course of the Company's business. Item 2. CHANGES IN SECURITIES Not Applicable Item 3. DEFAULTS UPON SENIOR SECURITES Not Applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable Item 6. EXHIBITS AND REPORTS ON FORM 8-K a). Exhibit 27-1 Financial Data Schedule b). Reports on Form 8-K. During the quarter for which this report is filed, the company filed the following Form 8-K's: July 12, 2001 Company announced initial agreements with four independent ethanol producers to market approximately sixty (60) million gallons of their ethanol production. August 15, 2001 Company announced Fiscal 2001 earnings and Fiscal 2001 fourth quarter results. September 6, 2001 Company provides update on York, Nebraska facility expansion. October 15, 2001 Company provides update on York, Nebraska facility expansion and reports Gary Smith's appointment as Chairman of the RFA. November 1, 2001 Company announces cash tender offer by Abengoa, S.A. to acquire all the Company's outstanding shares at approximately $5.63 per share, plus assume $15 million of debt. November 5, 2001 Company announced Fiscal 2002 first quarter earnings.

HIGH PLAINS CORP 10-Q